Analysts Say Nikko Investors Likely to Sell to Citigroup

Citigroup's $10.8 billion tender offer to buy Nikko Cordial looks just sweet enough to convince investors in the Japanese brokerage to sell, analysts said on Wednesday.

Citigroup's biggest takeover attempt in Asia is likely to succeed, the analysts said, because without support from the U.S. bank Nikko's shares will be vulnerable to a sharp fall if it is delisted from the Tokyo Stock Exchange (TSE), as many now expect.

Nikko's shares rose 1.3% on Wednesday to 1,357 yen, slightly above the offer price of 1,350 yen per share announced by Citigroup on Tuesday, as some investors bet that a rival bidder would emerge or that dissatisfaction over the price would force Citigroup to sweeten its offer.

But analysts were discounting those scenarios.

"The tender offer price represents almost no premium over fair value under current market conditions, but we consider it fair for shareholders because the stock could have declined sharply if Citigroup had not come up with the tender offer and the TSE decided to delist the stock," said Natsumu Tsujino, an analyst at JPMorgan.

Nikko, Japan's third-biggest broker, has been under review by the Tokyo bourse since December over an accounting scandal, and the Nikkei business daily reported that the TSE plans to announce on Friday that it will strip the firm of its listing.

Sources at Citigroup's most likely rival, Mizuho Financial Group, which like Citigroup owns just under 5% of Nikko, reiterated after the U.S. bank's announcement that Mizuho did not plan to launch a counter-bid.

Asked on Wednesday if the Japanese bank would sell into the tender offer, Mizuho spokeswoman Masako Shiono said nothing had been decided but that Mizuho "wants to maintain good relations with both Citigroup and Nikko".

Public Dissent, Private Acceptance?

Nikko's biggest shareholder, Chicago-based investment house Harris Associates, dismissed Citigroup's offer as too low, Bloomberg reported. But while speculators might object in public in hopes of getting Citigroup to sweeten its bid, they are likely to accept the bank's price in the end, analysts said.

Foreign funds such as Harris, which has accumulated a stake of more than 7% in Nikko since the accounting scandal broke, are more likely to lock in gains they have made on the stock's rebound than take the risk that Citigroup will walk away, the analysts said.

Citigroup is offering to buy all Nikko shares tendered but has set its minimum target at 50% of the brokerage's outstanding stock and has reserved the right to cancel the offer if it fails to secure majority control.

It plans to begin accepting tenders in the coming week.

While Citigroup's offer is hardly generous -- it gives a slim 10 yen premium to Nikko's closing price on Tuesday -- it falls within analysts' pre-announcement valuation range of between 1,100 and 1,440 yen per share.

Most analysts surveyed by Reuters changed their targets on Wednesday to match the bank's offer price.

Credit Suisse analyst Ryuji Kakimoto said there was a "strong possibility" that Citigroup's offer would succeed, and several others who asked not to be quoted concurred.

Debt Rating

Moody's credit rating agency put Nikko's debt rating on review for a possible upgrade on Wednesday, citing the likelihood of financial support from Citigroup, and Fitch ratings changed its view from "negative" to "evolving".

Both agencies, along with Standard & Poor's, have cut their ratings on Nikko since the accounting mess emerged.

Shares in Nikko had tumbled as much as 34 percent since mid-December on the threat of a TSE delisting, which would further hurt Nikko's reputation and credit ratings. The stock hit a low of 984 yen on Feb. 1 before rebounding on reports of Citigroup's interest.